19–17
19–27 (continued)
4. The paving and fencing are land improvements and should
be depreciated over their useful lives.
Land improvements (may be $50,000
combined with buildings account
— buildings and improvements)
Land $50,000
Depreciation expense $2,500
5. The cost and allowance for depreciation should have been
removed from the accounts and a gain or loss on sale
recorded.
Cost of asset $480,000
Allowance for depreciation:
To 12/31/15 –
480,000/10 x 3–1/2 168,000
For 20163 –
The correcting entry is:
Allowance for depreciation—
Machinery and Equipment $203,000
6. Donated property should be capitalized at its fair market
value.
Land $100,000
Donated Property
To record land and building for new plant donated by Crux
City.
19–18
19–27 (continued)
Depreciation expense $8,000
19–28 a.
To: In-Charge Auditor
From: Audit Manager
Subject: Concerns about the schedule prepared by the client and the
staff assistant in the audit of Vernal Manufacturing Company
The analytical procedures schedule for the audit of Vernal Manufacturing
Company is completely inadequate and needs to be redone. There are
several deficiencies:
1. The headings, references, and indexing on the audit schedule are
information than the single–step statement provided.
3. The schedule should include the additional columns showing the
in each account.
5. There is no identification of accounts that we are concerned may be
materially misstated. For example, the $1,381 change in
other expense may be significant.
investigation and the nature of such investigation.
7. There is no indication that the client’s explanations have been
19–19
19–28 (continued)
b. For every explanation provided by the client, an alternative possibility
is a misstatement in the financial statements. The auditor must be
ACCOUNT
POSSIBLE MISSTATEMENT
Sales
Cutoff error for sales
Sales returns and allowances
Returns due to technological deficiencies in
products that may indicate obsolete inventory
Miscellaneous income
Including proceeds of the sale of equipment as
income rather than decreasing the
equipment account
Cost of goods sold
Small increase in cost of goods sold compared
to net sales may indicate an overstatement
of ending inventory or understatement of any
of the accounts making up cost of goods sold
c. To perform a meaningful determination of the most important
variances, an alternative design of the audit schedule follows. It is
Sales $8,467,312 100.8% $9,845,231 102.5% $1,377,919 16.3%
Sales returns and
allowances (64,895) (0.8%) (243,561) (2.5%) (178,666) 275.3%
Net Sales 8,402,417 100.0% 9,601,670 100.0% 1,199,253 14.3%
Cost of goods sold:
Beginning inventory 1,487,666 17.7% 1,389,034 14.5% (98,632) (6.6%)
Purchases 2,564,451 30.5% 3,430,865 35.7% 866,414 33.8%
Freight–in 45,332 0.5% 65,782 0.7% 20,450 45.1%
19–20
19–28 (continued)
Selling, general and administrative:
Executive salaries 167,459 2.0% 174,562 1.8% 7,103 4.2%
Executive benefits 32,321 0.4% 34,488 0.4% 2,167 6.7%
Office salaries 95,675 1.1% 98,540 1.0% 2,865 3.0%
Office benefits 19,888 0.2% 21,778 0.2% 1,890 9.5%
Travel and entertainment 56,845 0.7% 75,583 0.8% 18,738 33.0%
Advertising 130,878 1.6% 156,680 1.6% 25,802 19.7%
Other sales expense 34,880 0.4% 42,334 0.4% 7,454 21.4%
Stationery and supplies 38,221 0.5% 21,554 0.2% (16,667) (43.6%)
Postage 14,657 0.2% 18,756 0.2% 4,099 28.0%
Miscellaneous income 6,365 0.1% 25,478 0.3% 19,113 300.3%
Total 49,830 0.6% (117,499) (1.2%) (167,329)(335.8%)
Income before taxes 2,725,372 32.4% 3,447,915 35.9% 722,543 26.5%
Income taxes 926,626 11.0% 1,020,600 10.6% 93,974 10.1%
Net income $1,798,746 21.4% $2,427,315 25.3% $ 628,569 34.9%
ACCOUNT
POTENTIAL ADDITIONAL
AUDIT PROCEDURES
1. Sales
Perform extensive cutoff tests and other tests
for possible overstatements.
2. Sales returns and
allowances
Examine supporting documents for the largest
sales returns and allowances and consider
the effect on inventory valuation.
19–21
19–28 (continued)
ACCOUNT
POTENTIAL ADDITIONAL
AUDIT PROCEDURES
3. Cost of goods sold. Cost
of goods sold increased
only $185,000, but sales
increased 1.2 million.
Do careful tests of physical counts, costing,
cutoff, inventory, and tests for obsolescence.
4. Travel and entertainment
Examine supporting documentation for large
travel and entertainment expenses.
5. Telephone
Compare telephone expense by month to
determine the possibility of a misclassification.
6. Legal expense
Analyze legal expense to determine the
possibility of lawsuits or other legal actions
that might affect the financial statements.
7. Depreciation expense
Compare depreciation by month to determine
the possibility of the failure to record one
month’s depreciation.
8. Bad debt expense
Performed detailed analytical procedures and
other tests of accounts receivable to evaluate
the adequacy of the allowance for
uncollectible accounts.
9. Other expense
Analyze other expense to determine the
nature of other expense and the possibility of
misclassification or incorrect accounting.
10. Gain on the sale of assets
Analyze the account to determine the nature of
the transactions and any misclassification or
incorrect accounting.
19–29
a. Property, plant, and equipment is in Topic 360 under Assets.
b. Topic 360–10–50–1 indicates:
notes thereto:
a. Depreciation expense for the period
19–22
19–29 (continued)
depreciable assets.
c. The ASC indicates that impairment is the condition that exists when
d. Topic 310-50-2 indicates:
impairment loss is recognized:
a. A description of the impaired long-lived asset (asset group) and
the facts and circumstances leading to the impairment
b. If not separately presented on the face of the statement, the
another valuation technique)
d. If applicable, the segment in which the impaired long-lived asset
(asset group) is reported under Topic 280.